AI: Hype or Value Creator?
Enterprise adoption of artificial intelligence (AI) is accelerating quickly. 50% of companies say they are using AI today in at least one business unit or function, up from 20% in 2017, according to a McKinsey survey. But the adoption of AI technology in PE-backed companies has been slow, according to Richard Lichtenstein, a Bain & Co expert partner who is leading the consulting firm’s AI-powered software solutions for private equity clients. “There are probably 10 or fewer funds that are really making a big push there,” he said in an August 2023 interview with S&P Global.
Private equity firms are at risk of missing out on a major source of value creation over the next 10 years if they fail to support portfolio companies with applying AI to marketing, supply chain, customer service, and other functions. Value Add estimates that AI will contribute $406 billion to the US private equity industry by 2030.
The AI revolution is coming at an opportune time for private equity. As the cost of capital has risen due to higher interest rates, buyout firms should be shifting their focus from financial engineering to value creation in portfolio companies. A wave of new technologies can help PE-owned companies with operational efficiency, commercial excellence, and risk management.
Value Add’s AI in Private Equity Report is a deep dive into the impact of AI in private equity as well as use cases for PE-owned companies. The 3,700+ word report includes sections on:
- Measuring AI’s Impact in Private Equity
- AI Use Cases for Portfolio Value Creation
- How to Implement AI for the Enterprise
Measuring AI’s Impact in Private Equity
Most industry analysts agree that AI will have a significant impact on economic output over the next decade. PwC estimates that AI will contribute $15.7 trillion to global GDP by 2030, with $6.6 trillion coming from increased productivity and $9.1 trillion from greater consumption. North America and China are expected to gain the most from AI adoption, with a 14.5% impact to GDP in the former and a 26.1% impact to GDP in the latter.
Private equity accounted for $1.7 trillion (or, 6.5%) of US GDP in 2022, according to an EY report. If we assume that private equity will grow to $2.8 trillion (8%) share of US GDP by 2030, then a 14.5% impact to GDP would suggest that AI will contribute $406 billion to the US private equity industry. For comparison, automation technologies currently contribute an estimated $85 billion to the US private equity industry, according to Value Add estimates, based on statistics from the Centre for Economic Policy Research.
At the portfolio-level, AI is expected to have a significant financial impact on companies, driven by the augmentation or displacement of labor-intensive processes with new technologies. One McKinsey model estimates that AI will increase annual net cash-flow by 6% for companies that are early-adopters. However, non-adopters must weigh more than just the opportunity cost of not realizing improved cash flow; non-adopters might fall so far behind competitors in some industries that their net cash-flow could decline by as much as 20% by 2030 as a result of not embracing AI technologies.